In January 2021, the world watched as GameStop, a struggling video game retailer, saw its stock price skyrocket by over 1,700%, all thanks to a spirited online community. Keith Gill, also known as Roaring Kitty, became a household name, embodying the power and peril of 'meme stock' investing. With Gill’s return to X bringing GameStop back in the news, we saw another rollercoaster of the GME stock prices. Now is a perfect time to explore this trend and compare it to more traditional investment strategies.
The Perils and Promises of Meme Stocks 📈
Meme stocks like GameStop attract attention for their rapid price movements, often driven by social media buzz rather than fundamental financial analysis. Often, these stocks lack the fundamental business performance to justify their sudden rise in value, making them highly volatile and risky investments. GameStop, AMC Entertainment, and Bed Bath & Beyond are prime examples of meme stocks, driven by the collective enthusiasm of retail investors rallying behind them online. While some investors have made substantial gains, many others have faced significant losses.
For instance, many investors who bought GameStop shares stock on Friday, May 10th at $17.46 a share rejoiced as prices surged to a peak of $48.75 on Tuesday, May 14th, a staggering 279% increase in just four days. However, by May 22nd, the price had plummeted to $21.09, meaning those who bought at the peak lost 56% of their investment's value.
That’s not to say there is never a justification for why retail investors are interested in a particular stock or that the recent trend of meme stocks is a recent phenomenon. The tulip craze of 1637 peaked with some single bulbs selling for as much as 10 times a skilled worker's annual salary. For a tulip 🌷.
The age-old advice of being cautious when everyone, even the shoe shiner, is talking about a stock still holds. Investing in these trends can be tempting, but it's essential to approach cautiously and clearly understand the risks involved.
Tried-and-True Investment Strategies
While meme stocks offer excitement and potential for quick gains, traditional investment strategies provide a more stable approach to building long-term wealth. Conventional financial wisdom indicates that picking the next GameStop, Bitcoin, or tulip right before the boom is closer to gambling than investing. For those seeking a more stable and reliable approach to investing it's worth looking into options like index funds.
Index Fund
[‘in-,deks ‘fend]
A type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index.
Definition according to Investopedia.com.
Index Funds match the value of a large number of stocks. This means the losses from one are balanced by the gains of another, betting on the traditional wisdom that over time the market as a whole goes up. That’s not to say that the market itself doesn’t go through periods of boom and bust, but if you have time to invest it's a solid bet to count on the market.
Alternatively, bonds provide a steady income stream with lower risk compared to stocks. Real estate offers potential for appreciation and income through rental properties. These strategies focus on diversification and long-term growth, minimizing volatility and ensuring a more predictable investment journey.
At First Bankers Trust, we offer a variety of investment products and services to help you achieve your financial goals with confidence.
📝 What are they? Certificates of Deposit (CDs) are time deposits offered by banks. You invest a fixed sum of money for a specific period, ranging from a few months to several years, and in return, you earn a fixed interest rate.
✅ Why consider CDs?
- Guaranteed Returns: CDs offer a guaranteed rate of return, which means your investment will grow at a predictable rate.
- Low Risk: As a low-risk investment, CDs are ideal for conservative investors who prioritize the safety of their principal.
- FDIC Insured: Your investment is protected up to $250,000, giving you peace of mind.
⚖️ Considerations:
- Limited Liquidity: You may incur penalties if you withdraw your money before the CD matures.
- Lower Returns: CDs typically offer lower returns compared to riskier investments like stocks.
📝 What are they? Money Market Accounts are savings accounts that typically offer higher interest rates in exchange for higher balance requirements. They provide limited check-writing privileges and sometimes debit card access.
✅ Why consider Money Market Accounts?
- Higher Interest Rates: These accounts often offer better rates than regular savings accounts, helping your money grow faster.
- FDIC Insured: Like CDs, Money Market Accounts are insured up to $250,000, providing a secure investment option.
⚖️ Considerations:
- Minimum Balance Requirements: You may need to maintain a higher minimum balance to avoid fees.
- Variable Interest Rates: The interest rates can fluctuate based on market conditions.
📝 What are they? High-Yield Savings Accounts offer significantly higher interest rates than traditional savings accounts. They are designed to help you earn more on your savings while keeping your funds accessible.
✅ Why consider High-Yield Savings Accounts?
- Higher Returns: Earn more interest on your savings compared to a standard savings account.
- Low Risk: These accounts are a safe place to store your emergency fund or short-term savings.
- FDIC Insured: Your money is protected up to $250,000.
⚖️ Considerations:
- Withdrawal Limits: Federal regulations limit certain types of withdrawals and transfers to six per month.
- Interest Rate Variability: Rates can change based on economic conditions.
The Basics of a Solid Investment Strategy
A successful investment strategy involves more than just picking the right stocks. It requires a comprehensive financial plan. Here are some foundational steps to get you started on the right path:
- Set Goals: Define what you want to achieve with your investments. Are you saving for retirement, a home, or your child's education? Setting clear, achievable goals will guide your investment choices and keep you focused.
- Track and Analyze Your Spending: Understanding your spending habits is crucial for making informed financial decisions. Use tools like the First Bankers Trust Mobile App, Mint, YNAB (You Need A Budget), or Personal Capital to monitor your expenses and identify areas where you can save.
- Create a Budget: Budgeting helps you manage your money effectively. The 50/30/20 rule is a popular guideline: allocate 50% of your income to needs, 30% to wants, and 20% to savings and investments. This structure ensures you are saving consistently while still enjoying life.
- Pay Off Your Debts: High-interest debt can erode your wealth. Focus on paying off debts, especially those with high interest rates, to use compound interest in your favor. Remember, if your investments are making 5% a year but your credit cards are charging 22%, you would be better off paying down the debt.
- Start Saving: An emergency fund is crucial for financial stability. According to Bankrate, 56% of Americans would struggle with a $1,000 emergency. Aim to save at least three to six months' worth of expenses to cover unexpected costs.
- Start Investing: Once your financial foundation is solid, begin investing. Investing allows your money to grow over time, helping you reach your financial goals faster. It always helps to have experts by your side whenever you start doing something as important as investing.
Introducing First Investment Services
First Investment Services, a Division of First Bankers Trust Company, offers expert guidance for those ready to delve deeper into the investment world. Imagine having six advisors with over 40 years of experience in your local community ready to help you navigate the complexities of investing. Our team can assist you in building a diversified portfolio tailored to your financial goals and risk tolerance.
Conclusion
Investing can be an exciting yet daunting journey. Whether you're enticed by the thrill of meme stocks or prefer the stability of traditional investments, it's crucial to have a solid strategy. At First Bankers Trust, we're here to help you navigate the seas of investing with confidence and expertise. Visit our website or contact First Investment Services today to start your journey toward financial success.
Remember, the best investment strategy is one that's well-informed, carefully planned, and tailored to your unique needs. Let's set sail toward a brighter financial future together! To learn more about our options to grow your assets fill out the form below!